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Euro Sets Record Highs Against US Dollar on Stock Market Declines

Tuesday, 24 July 2007 17:59:14 GMT  |  David Rodriguez, Currency Analyst

The US dollar continued its losing ways, plumbing fresh record lows against the Euro and 26-year troughs versus the British Pound. Renewed declines in US equity markets and a subsequent drop in bond yields were the primary drivers of dollar weakness, with a simultaneous drop in oil prices not enough to offset dollar bearishness. Fundamental data likewise did little for USD performance; a lukewarm Richmond Federal Reserve Manufacturing Index cut optimism for US Industrial Production growth.

The Euro scaled to a record $1.3851 against the dollar before remaining nearly unchanged at $1.3811 through time of writing. British Pound traders were likewise relentless in their USD sell-off, sending Cable to 26-year peaks at $2.0651 before a retracement saw GBPUSD at $2.0620. The Japanese Yen continued its recent rally against the dollar, with the USDJPY down 0.36 points to ¥120.71 in later New York price action.

A sparse US economic calendar saw a slightly disappointing result out of this morning’s Richmond Fed Manufacturing survey. The headline number remained exactly unchanged at 4 through July—below consensus forecasts of a gain to 5. Though the disappointment was hardly earth-shattering, it did serve to moderate expectations of accelerating growth in the domestic manufacturing sector. Recent Institute of Supply Management reports showed that the broader sector saw its strongest performance in 12 months through June. Today’s Richmond Fed data suggests that the ISM number may remain flat through July, but there are clearly other factors that may determine the future direction of the closely-followed national index. Traders initially sent the US dollar lower on the worse-than-expected Richmond result, but a later greenback bounce signaled that markets were unwilling to force strong moves on the mid-tier economic release. 

Domestic equity markets fared no better than the national currency, posting continued declines on poor earnings reports. The Dow Jones Industrial Average neared triple-digit losses at 96 points worse to 13,848. Tech stocks led the NASDAQ Composite 16 points off to 2,675, while the S&P 500 Index was the day’s biggest percentage loser at -12 to 1,529.45. Market losses were seemingly due to a renewed surge in global risk aversion, with the S&P 500 Volatility Index up 1.30 to 18.08—near the highs seen in the first quarter market correction. Continued gains in the VIX bode poorly for the future of US stock market performance, with subsequently bearish implications for the hugely popular foreign currency carry trade phenomenon. Simple calculations show that the VIX carries a strongly negative correlation with carry-favorites EURJPY, NZDJPY, AUDJPY, and GBPJPY. It is subsequently little coincidence that the jump in implied volatility coincides with a recent Japanese Yen rally. 

A flight to safety initially led US Treasury debt prices higher on the day, but a later retrace left the benchmark 10-year note down 1/16 to 96 and 15/32. Yields inched ever so slightly higher at +1 bp to 4.96 percent.

 

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